2019 (8) TMI 791 - AT - Income Tax

Registration u/s 12AA - charitable activity u/s 2(15) - educational institution where the surplus generated during the year is ploughed back for education purposes - HELD THAT - We find that except for the fact that the assessee society in furtherance of objects of providing education had consistently generated surplus during the last three preceding year, nothing is discernible from the records of the lower authorities which would irrefutably prove that generation of such surplus and not rendering of the education was the predominate object of the assessee society. Surplus in the hands of the assessee society (after claim of depreciation) ranges from 15% to 23%. The aforesaid surplus we find had been ploughed back by the assessee society for the furtherance of its object. We thus in terms of our aforesaid observations are of the considered view that the generation of surplus by the assessee society in furtherance of its predominate object of rendering education can in no way help to arrive at a conclusion that the emphasis of the assessee society was on generation of excessive surplus and not rendering of education. We are unable to subscribe to the view taken by the CIT(E) that the genuineness of the activities of the assessee society was not proved. In terms of our aforesaid observations, we are of the considered view that the CIT(E) had erred in declining to grant registration under Sec. 12AA to the assessee society. We thus set aside the order of the CIT(E) and direct him to grant registration under Sec. 12AA to the assessee society. - Decided in favour of assessee.

Issues Involved:
1. Refusal of Registration under Sec. 12AA of the Income Tax Act.
2. Examination of the objects and activities of the society.
3. Application of income and its examination at the assessment stage.
4. Genuineness of the activities of the society.
5. Purchase of additional land and its purpose.
6. Generation of surplus and its impact on the charitable status of the society.

Issue-wise Detailed Analysis:

1. Refusal of Registration under Sec. 12AA of the Income Tax Act:
The primary issue was whether the CIT(E) was justified in refusing the registration under Sec. 12AA of the Income Tax Act. The CIT(E) declined the registration based on doubts about the genuineness of the activities of the society, citing several financial discrepancies and the generation of surplus income.

2. Examination of the objects and activities of the society:
The CIT(E) questioned the genuineness of the society's activities based on several observations, such as the advance fees shown as current liabilities, security deposits not routed through the income and expenditure account, and inconsistencies in rental income. The Tribunal held that the CIT(E) should have confined his examination to the objects of the trust and the genuineness of its activities, rather than delving into the application of income, which is to be assessed at a later stage.

3. Application of income and its examination at the assessment stage:
The Tribunal emphasized that at the stage of considering the application for registration under Sec. 12AA, the CIT(E) should not examine whether the income is applied for charitable purposes. This aspect is to be considered when the trust files its return of income. The Tribunal cited the judgment of the Hon’ble High Court of Punjab & Haryana in CIT Vs. Surya Educational and Charitable Trust to support this view.

4. Genuineness of the activities of the society:
The Tribunal found that the CIT(E) had overstepped his jurisdiction by questioning the society's accounting practices and financial transactions, which should be examined at the assessment stage. The Tribunal noted that the advance fees and security deposits were correctly accounted for and did not affect the genuineness of the society's activities.

5. Purchase of additional land and its purpose:
The CIT(E) raised concerns about the purchase of additional land by the society, questioning its necessity and whether it was for educational purposes. The Tribunal found this irrelevant for assessing the genuineness of the society's activities. The Tribunal stated that if the land is used for non-educational purposes in the future, the CIT(E) has the power to cancel the registration under Sec. 12AA(3).

6. Generation of surplus and its impact on the charitable status of the society:
The CIT(E) argued that the society's generation of surplus income indicated a profit motive. The Tribunal disagreed, stating that the mere generation of surplus does not imply a profit motive if the surplus is ploughed back into the charitable activities of the society. The Tribunal cited the Hon’ble Supreme Court's judgment in CIT Vs. Surat Art Silk Cloth Manufactures Association, emphasizing that the predominant objective should be charitable, and any surplus should be used for charitable purposes.

Conclusion:
The Tribunal concluded that the CIT(E) had erred in declining the registration under Sec. 12AA. The Tribunal directed the CIT(E) to grant the registration, as the society's activities were genuine and aligned with its charitable objectives. The appeal of the assessee was allowed, and the order was pronounced in the open court on 05/04/2019.

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